Mary Holm: Timing is the key in exchange rates

With quantitative easing muddying economies, it's hard to know when to convert currency into kiwi dollars

The NZ-UK exchange rate was once NZ$3 to £1, but is now less than NZ$2 to £1. Photo / Thinkstock

Q: I have just received an inheritance of around £200,000 ($381,000).

I have it sitting in an ANZ UK pounds account earning 0.5% (an understandably low rate given the prevailing rates in the UK). The problem I have is in predicting the exchange rate in the coming months and years.

The exchange rate is currently well below recent historical values. It is now less than $2 to 1. I remember it being over $3 to 1.

Everything I read tells me that the UK is going down the gurgler and quantitative easing over there is likely to continue until the inevitable reset (aka financial collapse). So the future exchange rate is likely to worsen for me.

But maybe the New Zealand dollar will crash in the near future, should the fake recovery in the US be exposed (when quantitative easing there stops) and everybody rushes to the security of the US dollar and sells peripheral currencies, causing the kiwi dollar to fall.

What to do? Any advice would be appreciated.

A: You're far from alone in struggling to predict the exchange rate. Nobody can accurately forecast what will happen to our dollar relative to others. Some people reckon they can, but if you watch them for a while I bet you'll find their forecasts are often wrong.

The trouble is there are many factors that could affect exchange rates. You've mentioned some key ones, but not the only ones. And that's not counting unforeseeable factors, such as natural disasters.

So what should you do? Lots of research has found that people hate to lose money more than they like to gain money. If you move all your money at once, it might turn out to be the best time, but it might also turn out to be the worst time. To avoid the latter, most people are content to give up on the former.

The best strategy, then, is to move some of the money now, some soon and some later. You'll look back to see that at least some of your moves were good ones.

How much you transfer at each stage, how many stages there are, and the timing of it all is up to you. With a sum as large as £200,000, it might be worth breaking it up into, say, five lots of £40,000, with six-month gaps between each move.

However, if you want to get the money here sooner than that - perhaps to buy a house or start a business - shorten the gaps and get on with it. You're lucky to get such an inheritance, and you might as well be enjoying it.

Capital gains exemption

Q: As far as I see it, the main problem with a capital gains tax is that the general public believes it is their right to receive tax-free benefits from the capital increase of their family home (after all, that is what previous generations have had). This sounds reasonable until you realise that one person's $400,000 home is another person's $20,000,000 dairy farm.

What are the downsides to a system similar to that used in Canada, where every person has a lifetime $500,000 capital gains exemption account (which would be adjusted for inflation)? Once that exemption has been used up (sale of a house, sale of a business, could be multiple small transactions) then all future capital gains are taxable at whatever rate is determined.

This seems relatively simple to implement for the IRD, simple to understand for taxpayers, no obvious loopholes and will minimise market distortions.

A: I'm not sure that the "previous generations" argument holds. There are many things they had that we don't have, and vice versa.

Nor is it necessarily a good thing to exempt the family home from a capital gains tax. Labour has said it will do so, presumably because it would be political suicide not to. But the exemption is likely to distort people's investment decisions, in that they will tend to put more of their savings into their home than they might otherwise do.

These are the sort of issues that experts wrestle with when introducing a new tax. Another example is your point about someone's farm being their home.

Labour's solution: "For farms the owner-occupied dwelling and curtilage will be exempt (similar rules used to apply re stamp duty on farms)," says finance spokesperson David Parker. Curtilage means the area immediately surrounding the farmhouse. The rest of the farm will be subject to the tax.

On the Canadian system, it sounds good but I bet there are some downsides. New Zealand experts have been eyeing other countries' capital gains tax systems for years, and haven't found perfection yet.

Parker's comment on Canada: "An interesting idea, but not Labour party policy."

Student loan penalty

Q: I read with interest the item headed "Student loan query" two weeks ago, about how you can't use KiwiSaver money to repay a student loan.

After spending six long years at university, my son qualified with first class honours and worked in New Zealand for two years before the call of OE got the better of him.

At school and uni he worked after-hours. As a consequence, he has accumulated a reasonable amount in KiwiSaver, enough to pay off a fair whack of his student loan.

Although he has a job in the UK, his salary is really only sufficient to pay for food and board and the odd weekend trip (on super cheap airfares) to parts of Europe, which was the whole aim of the exercise.

Now that our Government has slapped a healthy interest rate (5.9 per cent) on outstanding amounts for those student loaners who are overseas, this policy is effectively crippling people like my son from realising their dream.

As the "post box" for my son's student loan communications from the Government, I am privy to the amounts due. They expect a minimum amount paid back on a six-monthly basis. This requirement is fine and understandable, but the interest rate imposed on the balance exceeds the minimum amount due and payable, even for my son's relatively small balance (about $25,000).

By the end of the year he owes more than he started with. The only way to remain ahead is to make a lump sum payment at the beginning of the tax year equating to the amount expected by Government.

It seems somewhat incongruous to me that Government slaps these penalties on students who want to do the right thing. If my son was able to use his KiwiSaver funds to pay off his student loan he would be on a much better footing to return to the New Zealand work force and recommence his KiwiSaver contributions.

My son was told he could not use KiwiSaver to pay off his loan, so Government is taking interest from him as well as using his moribund KiwiSaver contribution for other things. Is this fair to our youthful generation?

A: An "interest-ing" question. As I said two weeks ago, people in New Zealand with student loans are better off not using KiwiSaver money to repay their loans - even if that were allowed - because the loans are interest-free. But it's quite different for those overseas who must pay interest. You make the case well that they should be able to use at least some of their KiwiSaver money for loan repayment. Perhaps they could use their own and employer contributions but not government contributions - the same as with first home withdrawals.

It's not correct, though, to say the Government is using your son's KiwiSaver money. It's invested through a private company and earning returns for your son.

Still, it's quite possible the KiwiSaver returns, after tax and fees, are lower than the 5.9 per cent he pays on his student loan. This would make loan repayment with KiwiSaver money - if it were permissible - a smart move.

The oldest profession

Q: Thank you, Mary, for your compassionate response to the young student last week.

I totally believe in the decriminalisation of prostitution. Perhaps "the game" is a reasonable business opportunity; I'm not sure about that. Perhaps it will become socially acceptable. That'll take time, I think.

In the meantime, I (65, married bloke) wanted to be able to tell her to take care, too.

A: I'm not sure we'll ever regard prostitution in quite the same light as other work. And I'm not sure we should, because of its psychological effects. But this is straying far from my area of expertise!

Saddened by plight

Q: With reference to the letter last Saturday, that had to be the most heart-breaking letter I have ever read. Start weeping whenever I look at it. The poor little thing. Thank you for giving her such a careful and respectful reply.

A: And thanks for yours and other similar messages - and also to the readers who have offered to help the young woman with accounting or mentoring. I have forwarded your letters.

Emotional bankruptcy

Q: Could the following be shared with the young woman who wrote seeking financial guidance on her sex worker income? I felt sad about her enquiry also.

Dear Young Enquirer: Thank you for your honest letter to Mary. I was saddened by your means of acquiring an income and estate, and wondered if the following thoughts might be helpful.

I acquired what you are seeking financially by a different method. But I found I couldn't give it up when the time came because I had a mindset that converted everything, including relationships, into money terms. I couldn't escape this and it took me years to admit that I was trapped.

If you find this is the same for you - for example, your umpteeth relationship has ended in tears and pain and you feel emotionally bankrupt - find the one who loves you unconditionally, money-loving and confusion included, and bask in that love. I found it gave me a spiritual awakening that set me free. For some this is a religious journey, for some it isn't. It gave me a sense of being a full human being.

At first I blamed my parents, that I'd never known unconditional love, then I realised they gave me emotionally what they could. But it's our culture that doesn't give us opportunity to become fully human, emotionally speaking.

Hope this is helpful. If you continue being self-honest as you are now, you will become a great leader in your generation. Go well.

A: I agree that the young woman seems to have strong integrity and strength.

This is taking us even further from personal finance. But what you say makes sense. Thanks for writing.

• Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.

Mary Holm is a columnist, best-selling author and seminar presenter on personal finance. She is also a director of the Financial Markets Authority and the Banking Ombudsman Scheme, and holds an MBA in finance. Previously she was business editor of the Auckland Sun and Auckland Star, and has worked for the NZ Listener, Australian Financial Review and Chicago Tribune. She has been called “The nation’s favourite investment agony aunt.”